In the aftermath of the global economic crisis of 2008, India surprised itself and the world with only a moderation in growth rates followed by a surprisingly quick and robust return to a high growth path. The feel-good factor was so strong that achieving double-digit GDP growth rates appeared feasible for the first time and targeting a growth rate of over nine per cent became realistic. Some observers even began to speculate about India’s GDP growth rate overtaking China’s soon.
In recent months this optimism has receded. GDP growth rates, far from reaching nine per cent, are expected to be lower in the coming quarters. Persistently high inflation has necessitated interest rate increases by the Reserve Bank of India (RBI). The country’s fiscal deficit remains under pressure. Given the global economy is in difficulty again and the growing apprehension about the imminent recession in the US and Europe, the external environment is also seen as not being helpful in the near future.
A consensus seems to be emerging that controlling inflation even as maintaining a growth rate of around eight per cent could be a challenge under the current circumstances. But are there other options that can nudge growth upwards? The challenge is to find ways of increasing investment without increasing the deficit or the RBI softening its anti-inflationary stance. There is a need to go beyond conventional approaches to see how public investment can be enhanced and how the policy and regulatory framework can be used to step up private investment.
Increasing public investment without seeking budgetary resources is, fortunately, not as hard as it may appear. In the telecom sector, the Universal Service Obligation Fund with the government, for providing services in areas that the private players in the market do not cover, has been growing over the years, withdrawals being far less than annual accruals. The Fund should have well over Rs 30,000 crore in it. An aggressive push to use this money and anticipated inflows to take broadband services to rural India would trigger even greater economic vitality and dynamism than the rapid penetration of mobile phones has done over the last decade. It should be possible to aim at 10 million new internet connections every month sometime next year, mirroring the earlier achievement for mobile phones. This can work wonders.
One of the quiet and somewhat uncelebrated successes of the past 10 to 15 years has been the improved efficiency and profitability of many of India’s public sector undertakings (PSUs). As a result, over time they have been reducing their debt-to-net worth ratios and have been adding to their reserves. They are underleveraged and can be used as engines to enhance the pace of investment. This has not been happening on its own for a variety of reasons: difficulties in getting environment clearances and land, a cautious management culture, limited investment potential in their areas of business, and the absence of a mandate to diversify and find new business opportunities. To illustrate, Coal India cannot step up its pace of mining investment since environmental clearances have not been forthcoming, though it has the mining rights, so the country is being forced to import more expensive coal. Similarly, NTPC is adding to its reserves even as power shortages continue to plague the country. Well-coordinated government intervention to remove impediments of environment clearance, land and red tape could help step up investment.
Some companies would still have reserves in excess of their investment needs. BHEL, which keeps accumulating cash, would be a good example. Their reserves could be used as equity in desirable areas through new ventures. Potential investments could relate to infrastructure, ranging from new airports to new cities to high-speed trains. Most of the Shatabdi routes could do with new high-speed trains with new tracks. Such investments could be commercially viable. The London-Paris high-speed train is a good example. These could also cover strategic investment in manufacturing in key areas such as commercial aircraft and high-speed trains.
Such diversification and joint investment are difficult within the framework of line ministries and would need overarching decision cutting across profitable PSUs and ministries concerned. There are interesting models in India’s private sector of new ventures promoted by industrial groups through their existing profitable companies. Internationally, EADS is a good example of state-promoted strategic investment to create a successful European aircraft manufacturer that is competing well with the US aircraft industry.
Though there has been considerable progress in attracting private investment in infrastructure in recent years, the need to speed up investment is well recognised. There is considerable potential for increasing the pace of investment in the short run if greater flexibility were brought in decision making. An easy way to get private investment in infrastructure, be it expressways, transmission lines or airports, is through annuity-based bids for construction, maintenance and operation for periods ranging from 15 to 25 years. For networks that are natural monopolies, annuity-based contracts, in any case, provide the advantage of getting the infrastructure in place ahead of demand. The income from user charges gets delinked and would rise as demand picks up to not only cover annuity payments but also provide a surplus in later years. The uncertainties of future demand and the associated costs and risks are better borne by the state. Capital markets would readily finance annuity-based infrastructure projects at competitive rates. After an initial surge, the pace of awarding such contracts could be moderated to see that the net annuity liabilities are fiscally sustainable after user charges have been factored in.
The challenge lies in the need for unconventional decisions going beyond comfortable precedents and the defined charters of PSUs and individual ministries.
The author is a distinguished fellow at Teri and former secretary, DIPP.
ashankar49@gmail.com
